A World Money Plan

October 25, 1965

At the end of September the International Monetary Fund held its annual meeting in Washington and celebrated its 21st birthday. Secretary Fowler happily announced that the fund had been broadened this year by the addition of Malawi and Zambia. The delegates of the 103 nation-members made speeches. Nearly all of them said that the IMF monetary system has been working very well but is in urgent need of reform.

The system has, of course, been working very badly. The last twenty years have been years of disgraceful world inflation. In the last ten years alone the German mark has lost 19 percent of its purchasing power, the British pound 26 percent, the Italian lira 27 percent, the French franc 36 percent and leading South American currencies from 92 to 95 percent. The keystone of the system has been the American dollar. It has lost 43 percent of its commodity-purchasing power since 1945.

Plainly reform is urgent. But nearly every proposal for reform has been in the wrong direction. Each wants to create more “international liquidity,” which in English means more paper money. President Johnson says that what is needed is “the creation of additional reserves.” Secretary Fowler adds: “We can hardly expect that . . . the world can be satisfied very long to limit future growth in reserves to the very modest level of new monetary gold supplies.”

If this means anything, it means that the new “reserves” are to consist of paper money.

DISGUISING INFLATION

Well, why can’t each country simply print whatever additional paper money it thinks it needs? The reason is that naked inflation is in disrepute. But techniques that disguise it are still fashionable. For the last twenty years the United States has been printing additional paper dollars and sending billions of them abroad. These exported dollars do not put up the prices of American goods; and so our authorities can say that “there has been no (or very little) inflation.” But the dollars do put up the prices of the foreign goods they buy. In addition, our dollars end up as “reserves” in the central banks of other countries. Against these “reserves” the other countries print additional amounts of their own currency. Though this brings on inflation in these countries, it is all considered very respectable.

In still another way the IMF system encourages world inflation. When a country creates a deficit in its balance of payments through its own unsound policies—too much paper money, budget deficits, holding down interest rates, pegging its currency at an overvalued level—it can borrow from the IMF. Or other countries combine to make it a loan. By being continually rescued the monetary sinners are encouraged to continue their sins.

DISSOLVE THE IMF

To the scores of existing plans for international monetary reform I should therefore like to add another. It is the opposite of nearly all the rest. Dissolve the IMF. Or at least make it stop all forms of automatic or easy-to-get credit.

As Karl Blessing, president of Germany’s Bundesbank, said in the most realistic speech at the IMF meeting: “If a country enjoys confidence, it can obtain credit from anywhere; if it does not enjoy confidence, it must, first of all, adopt measures to regain this. I cannot help thinking that too perfect a machinery for financing balance-of-payments deficits weakens monetary discipline and contributes to creeping inflation.”

After the IMF had been dissolved (or had at least halted all no-questions-asked credit or soft loans), each nation would be forced to see both the advantage and necessity of returning to sound money. It could do this by (1) halting any further increase in its paper-money supply; (2) by letting exchange rates go free, and ceasing to try to maintain an artificially pegged value for its currency either by prohibitions on its citizens or by government intervention on the foreign-exchange market; and (3) finally, by making its currency, perhaps in several stages, directly convertible into a fixed amount of gold.

This would restore international cooperation in currency stability instead of the present system of central banks cooperating in inflation.